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Monday, July 14, 2008

Monday Came Too Soon

Ay-yi. For May, they are reporting a 0.6 decline on the year and a monthly drop of 1.9. Couple that with June's PMI showing that Eurozone mfrg and service industries contracted in June, and it's a depressing picture. The Eurozone economy is following an almost classical pattern of a move into recession, with softness, then an upward peak in the first quarter, and now a sudden, increasingly correlated sharp downward move.

In other news, one of the UK banks I had marked for failure was A&L. Banco Santander is buying it, which is a darned good thing. Maybe not for Banco Santander, though, which was one of the players in the ABN AMRO deal which seems to have put RBS short of cash at a very bad time. This time Banco Santander may have swallowed a bit too much for the times, but on the other hand A&L's offices give it another way to raise money - through deposits! But what about A&L's liabilities?

The Treasury GSE deal as proposed makes sense. Acquiring stock for the public funds is the way to go, because if you want access to mortgages, you just can't stiff those who have bought the mortgage bonds. If you do, they will not keep buying them! Still, Congress must act, and Congress is moving like a dying, foundered elephant these days. If Congress doesn't move relatively quickly on this, the resurgence might falter quite quickly.

I will try to write more later. I have a busy day, and I'm tired already.

A tree fell down last week at the house. For a few days we tried walking past it with our eyes averted, hoping that the tree fairies would magically take care of it. But that did not work - perhaps we should have set out a bowl of boiled peanuts or milk or something to attract the tree fairies. However, it is certain that the Brat Princess would simply have found the offering and eaten it, and I have never seen her do anything with wood but eat some when she was feeling a mite peckish. So this weekend we roused ourselves, and the remnants of the tree are neatly cut, split and stacked. One snake killed, three others chased. I hurt all over. The Brat Princess spent the weekend coming out to survey progress, and making grim eye comments about mad dogs, Englishmen, and sun before returning to the shade.

The Ranbaxy news hurt the entire Indian exchange, but the European exchanges are getting a boost from the US GSE rescue plan news. The US should have a so-so day.

Oh - on crude prices? Talk about being on thin ice! Airlines are cutting, drivers are cutting, and US heating oil sales will drop at least 20% compared to two years ago. It could be as much as 30%, because the supply chains are breaking down; it's not even clear that the distribution companies can keep buying the stuff. And if we can't, the demand for oil for space heating needs will be hurt in other northern areas as well. Space heating spikes oil demand by at least 4%, so between the current withdrawals and what we know will happen this winter, we're looking at a minimum 2% decline in demand over the NH winter. That's enough to blow the spot market.

Any theories about Asian countries magically stepping in and buying more are well-grounded in fantasy. China and India are tight on coal (India's trying to open up some domestic abandoned coal mines, and China is just not buying enough to prevent power shortages at current prices), much less oil. Everybody is turning to coal except the US due to our stringent environmental regulations and the stranglehold of greenies going to court. Even some of the Gulf nations are burning coal to generate power because they can import coal and export oil for a profit. There's way more support for coal pricing than oil.

The only recourse for oil traders I can see is to try setting out bowls of milk to see if the oil consumption fairies will show up. It did not work for me, but what the heck, it is no weirder than other things the Street has done lately. I know one genuinely brilliant Street guy, but it appears that he is way above the average.

A further Bloomberg article about the disappointing performance of Street analysts. I don't know whether to laugh or cry:
Goldman Sachs Group Inc. called international sales a ``life saver'' in April for companies like 3M Co. UBS AG predicted at the end of last year that global growth would boost Cisco Systems Inc. Morgan Stanley said in January that emerging markets would fuel gains in General Electric Co.

All of them were wrong.

3M, Cisco and GE tumbled more than the Standard & Poor's 500 Index this year, sending Morgan Stanley's ``New Nifty Fifty'' index of companies that depend on overseas sales down 18 percent, the worst start in six years.
No kidding. Even Bill Gross is conceding on the USD. It's down to the same old same old. If the US, Japan and Germany can't keep staggering along providing some impetus to the world economy, we've got a global recession or perhaps much worse in the works.

For Germany to keep going the Eurozone has got to allow countries to roll back energy taxation. I'm very worried about Japan; it is uniquely vulnerable to the current situation. But if it can pick up some with Indian companies plus get a bit of a boost from Germany, they at least will make a heck of an effort. The US is still surprisingly strong, but consumer demand is due to collapse for all but necessities due to energy pricing this winter. India will probably start picking up some market share from China in some industries like textiles, and China is in a fix.

Newcastle coal topped out? I think so; the high was $201 July 1st. The top in coal prices has implications for some Asian countries that could worsen currency/exchange trends.

MOM, I read an interesting idea about oil futures prices and would like to get yourtake.

Most oil futures traders do not, nor dothey have the facilities for taking delivery on the contracts they buy and sell. However if you have not closed out your position by expiration date you will have to take delivery or find someone who will take it for you.

Suppose the Saudis were providing cash to front men who were trading and taking delivery so to keep oil off the market and support unusually high prices? Would this not be a way of manipulating the market and leave little evidence of manipulation?

Just askin.'
Jimmy - I thought the likely culprit was ICE, which is allowing people to trade unregulated and probably without settling. In a balloon market all sorts of things can happen.

I don't agree with the main contention of this article, but I think it contains a reasonably good summary of trading mechanisms that probably have added about $30-$40 a barrel.

For hedgies to move markets they need a lever; in this case the shadow futures market probably is that lever.

There's no need to postulate Saudi interference (although Dubai set up an exchange of its own) when you have the same people who thought Alt-A mortgages would never default playing in these waters.

In general, when commodity bubbles or spec trading takes off on the regulated exchanges they take action such as raising margins to control it. If one has to post a bond equal to 50% of one's trades, or 30%, it controls how much of a balloon you can float. When unregulated exchanges allow extremely low margin trading, it allows people to speculate with very little actual money and the speculators don't take market fundamentals very seriously. To them their potential loss is just the difference between one contract and another, rather than being forced to close out their whole position or a big portion of it. The trade dynamics are totally different, because probably most of the players NEVER EXPECT TO SETTLE. They are swapping one set of bits for another set of bits and an entry in an electronic database monitoring their putative gains or losses.

Margin stock buying brought on the 1920s stock inflation and subsequent crash, and it looks to me like oil futures are doing the same thing.

I agree with you on Europe entering a recession. For them, it will be a "classic" recession. We will not be so lucky.

No other "stable" country in the world has the imbalances that we do. They range from excessive current account deficits to zero savings to reliance on negative real interest rates. But it goes further than that: our imbalances are all links in a chain that recycles emerging markets savings, amplifies it with leverage, and fuels excessive spending. The entire chain is now in peril due to emerging markets inflation. The Europeans, for all their problems, are not exposed to the same dynamic. Our adjustment will dole out pain to everyone, but we will suffer the most.

The impact from heating oil price increase is going to be staggering this winter.

My 83 year old mother called and asked me about a letter she'd received about oil pricing (lives in SE Pennsylvania). Floor/ceiling prices for the different plans are $5.30 to $5.80. At the ceiling, it's roughly 2X the price last year. Heating will roughly double -- to somewhere in the neighborhood of $1500/month.

I think that, at least in areas dependent on oil heat (much of the mid-Atlantic and north) the impact will be crushing -- as much psychologically as financially.
Thanks for the link. I learned a lot from that discussion. Since the unregulated trading started in 2006 and that was more or less the beginning of the current oil price bubble, it does look like a possible connection.

It certainly seems to show that supply and demand don't have that much influence on price. I had no idea you could buy futures and never have to settle.

I worked with a commodities speculator years ago. He got caught out a couple of times. Took delivery on a railroad car of eggs once. (Sold 'em off at a big loss to a grocery chain.) Another time he took delivery of a car of fryers. (He actually managed to unload those at a small profit.)

It appears there is now no limit to the size move oil can make. In most commodities I'm familiar with there was a limit both up and down.

I'm pretty well convinced that the market is being gamed and there is little connection bewteen supply/demand and price at this point. Can they keep it up there even with demand falling?? I guess we'll see.
They are not really futures, Jimmy. They're sort of derivatives of futures that are based on futures contracts. In theory you could end up with a fat load of crude but in practice it would rarely happen because you trade back to the exchange. I think they are moving the market in almost exactly the same way that the indices set up for subprime MBS were used. This is a similar product used to trade coal.

This is a short overview of how such products can be used, based on NG. Note the discussion of swaps. On an unregulated exchange combining swaps, options and futures-based contracts one can get incredibly creative.

Not only that, but there are players whom it may benefit to lose money on their plays on this exchange if they can move the market enough.

As a purely speculative example which has ABSOLUTELY NO BASIS IN FACT, suppose your name happened to be D Poone Tickens, and you had a very large position in NG. You know that if oil hikes another $15 USD, you stand to gain a huge amount on your actual futures contracts for your NG, because it will experience a relative rise in concert with oil, and you have oodles more NG than you will have to play with to move the market. Just suppose you got frisky on the unregulated futures look-alike oil exchange. You can afford to buy quite a few oil contracts at prices that will give you a loss on that trade if it moves the prices on the actual futures oil market and thus advances NG futures prices. And if you have enough people shadowing you, you may even make money on it for a while. Not only that, but you may be able to offset your losses on the oil trades by buying swaps in an unregulated market on either commodity or a third which is also related, such as coal (in this purely abstract, hypothetical universe we are postulating for the purposes of constructing a workable alternate universe). It takes money, but if there is a low margin requirement not that much actual money is tied up.

Mind you, there are completely legit usages of all such products. However unregulated exchanges that do not report the traders and the trades to an authority would cause Archimedes to become very, very excited.
Anon - is there any possibility that your mother can go to or supplement with electric heat? At those prices, heating with electricity should be considerably cheaper.
David - the Europeans are in this just like everyone else.

I don't see this as a chain with two ends, but rather a circle. I think I will try to address the rest of your comment tomorrow. I'm not sure how much we disagree, but perhaps we do substantially.

The US will rebalance by dropping consumption and increasing production, and that is already happening.
MOM, your tree story sounds all too familiar. We had to do the same thing not too long ago. We didn't have the snakes visit us though and there are plenty here in Texas!
Yes, there are plenty of snakes in Texas! That's even if you exclude the politicians.

You know how it goes. There are two phases of life. One is before you are a homeowner, when you say to yourself "I want a tree! With a swing in it!"

In the next phase, you get your tree and find it lying across your driveway one morning....
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